Small Cap Value Report (Thu 14 Mar 2019) - RBG, DEB, IPEL, DFS, SDRY

Revolution Bars

Here are my overdue notes from a recent meeting with management of Revolution Bars (LON:RBG) (in which I hold a long position). The meeting covered the points in the recent interim statement, with a bit more detail, and also some Q&A. It was also a get-to-know-you session with the new CEO, Rob Pitcher, who started in late June 2018.

The original reason I invested in RBG, several years ago, was that it was a self-funding roll-out of highly cash-generative bars, combined with takeover potential. Sure enough, we got a 203p cash bid in 2017 from Stonegate, which bizarrely for a recommended offer, was turned down by shareholders at the last minute. I can't remember that ever happening before, so it was actually a rational (but ultimately incorrect) opinion to wait for either the 203p cash bid to finalise, or a higher competing bid to come in. Sometimes things don't pan out as we hope.

Since then, the share price has collapsed, to only 63p - suggesting that the stock market thinks that the business is going down the pan. Therefore, in assessing this share today, it is a given that performance has disappointed. The question now is simply whether the share price has overshot on the downside, and what upside there might be from here if a turnaround takes place?

1)Dividends suspended - widely expected (I suggested that it might be wise to suspend the divis, here in Oct 2018). Also, broker notes had floated the idea that divis might be suspended, due to heavy expansionary capex on new sites.

So for anyone paying attention, the divis being suspended should not have come as a surprise at all. My only complaint here is that management could have been more savvy, and slashed the divis to something nominal, say 0.1p per share. That would have suited some institutions, which are mandated to only hold dividend-paying shares.

Management are clear that the company will return to the dividend list in the not-too-distant future - so this should be…

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Revolution Bars Group plc is a United Kingdom-based operator of bars. The Company has a trading portfolio of approximately 60 bars located predominantly in town or city high streets, which operate under the Revolution and Revolucion de Cuba brands. The Company's bars focus on a drinks and food-led offering, and typically trade from late morning, during the day and into late evening. Revolucion de Cuba bars are characterized by their 1940s Cuban-inspired style, with dark woods, traditional bar counters, antique tiles, vintage furniture, Havana-style ceiling fans, and original Cuban artwork and photographs. Its bars are located in various places, such as Cambridge, Ipswich and Norwich in South East; Bath, Plymouth and Southampton in South West; Birmingham, Derby, Leicester, Loughborough and Milton Keynes in Midlands; Cardiff and Swansea in Wales; Blackpool, Chester and Huddersfield in North West; Sheffield, Sunderland and York in North East, and Edinburgh and Glasgow in Scotland. more »

Debenhams plc is a United Kingdom-based company, which is engaged in multi-channel business. The Company’s brand trades through approximately 240 stores in 27 countries. The Company's segments are UK and International. The UK segment consists of stores in the United Kingdom and online sales to the United Kingdom addresses. The International segment consists of international franchise stores, the Company-owned stores in Denmark and the Republic of Ireland, and online sales to addresses outside the United Kingdom. The Company's stores trade under the name of Debenhams other than the Danish stores, which operate under the Magasin du Nord banner. Its stores offer customers a range of services, including restaurants and cafes, personal shopping assistance, hairdressing and beauty treatments, nail bars and wedding or celebration gift services. Its Debenhams Direct (www.debenhams.com) offers a range of products and services for online customers. more »

Impellam Group plc is a holding company that provides strategic planning and management services to its portfolio of subsidiaries. It is engaged in the provision of staffing solutions, human capital management and outsourced people-related services in the United Kingdom, Ireland, North America, mainland Europe, Australasia, New Zealand, Singapore and the Middle East. It’s segments include Managed Services-UK, Europe and Australasia; Specialist Staffing-UK, Europe and Australasia; Managed Services-North America, and Specialist Staffing-North America. It operates various supply models within its Managed Service Programs (MSP), including Neutral vendor, Master vendor and Hybrid vendor. It also offers Recruitment Process Outsourcing, which refers to the outsourcing of permanent, temporary and contract recruitment. It offers staffing services for specialties, such as Healthcare, Legal, Engineering and technical, Construction, Catering, Driving, Office and Industrial. more »

He may well be proven right eventually but so far it's been a tremendous opportunity cost when you consider that other stocks have done well since that time. Personally, I don't trade stocks to be proven right, I trade stocks to make money.

Just to clarify... my point was not that Revolution Bars (LON:RBG) need a RIGHTS issue, or that I cast any doubts on the opportunity - if the sites can make as much money as they do when they have been badly run for so long then there is very obviously an opportunity. I don't have an opinion as to how successful the CEO is likely to be.

My cynical observation was that current institution shareholders who did believe the new CEO might turn the company around would naturally want to buy shares to average down, as Paul as others have stated they want to do. The easiest way for them to buy shares, in bulk, at the cheapest price would be if the company issued NEW shares. My argument was thus that some major stake holders - shareholders, banks and a new mgt team have an incentive to have a RIGHTS issue or PLACING and extra money could certainly be used.

Does anyone know the average daily net debt? Trade payables are up 3m in the last 6 months?

I don't know. I know that CASH outflow in the last 12 months was at least £10m and that is a tough tanker to turn around. Extra sales are very possible with good management but naturally that comes with investment in refurbs and also marketing promotions and price cuts.

The lack of buyers to break the strong chart downtrend (50d at 84p) also make me hesitant.

I have no position and have considered buying but decided not too as there too much risk for my strategy.

Any chance on getting your thoughts at some point on yesterdays French Connection update with the dream of a bid still alive and the possibility there might be more possible bidders in the mix than the four parties who were initially in discussion with the board.

this morning when Paul 1st posted about RBG, it was over 1% down, its now 2.2% up.

I hate that type of thing, and we need to avoid it as much as possible.

This column is not a tipping service, and we want everyone to use the Stockopedia tools, and DTOR. That's why Graham and I only ever give our personal opinions, and emphasise that sometimes we're right, and sometimes wrong. I tend to get it about 60:40 right:wrong in an average year.

Although I do think we're very good here in the SCVRs at warning people about dodgy accounts & balance sheets, which helps people avoid losses. Probably the only insolvency that we didn't spot in advance, was CAKE, and who could have predicted that?

I have no idea whatsoever, what the share price of RBG is likely to do, short term. However, I'm pretty confident that if the turnaround works, then it should be usefully higher in say 1 year.

Any chance on getting your thoughts at some point on yesterdays French Connection update with the dream of a bid still alive and the possibility there might be more possible bidders in the mix than the four parties who were initially in discussion with the board.

Sure. I've looked closely at the French Connection (LON:FCCN) (in which I hold a long position) results, and I'm positive about the future. A few key points;

Balance sheet is amazingly strong, such that the market cap is equivalent to just the group's working capital (it has no debt)

Sale of Toast has boosted cash, but trimmed back retail profits by about £1.5m

Wholesale division is doing really well, including very positive trading in the USA, to Dept Stores - this is a surprise on the upside

Retail division still incurring gigantic losses - so a surprise on the downside. This is concentrated in a small number of major problem shops, I believe. Short remaining lease terms means that these losses should reduce significantly in the next 4 years - giving a big boost to profits in coming years

Sale of the business still live, news expected in next 3 months. Brexit can't have helped, so I think the stock market is sensibly not anticipating anything here

Breakeven now, which is a major turnaround from a few years ago, yet, share price unchanged - doesn't make sense

Very few investors seem to understand the opportunity here - that the retail losses are about to reduce significantly, as problem leases expire. Meanwhile, wholesale is going great guns, and licensing is pretty good too.

This share is worth 100p+ in my view.

Downside is minimal, as it's now profitable, and has a rock solid balance sheet.

I reckon it should make £3-5m profit this year (2019), due to cost savings, and reduced retail losses from closure of heavily loss-making sites.

I'll be buying more, when funds permit. Trouble is, at the moment, I don't have any spare cash, more's the pity.

Thanks for your clarification, but I still think you're wide of the mark.

My cynical observation was that current institution shareholders who did believe the new CEO might turn the company around would naturally want to buy shares to average down, as Paul as others have stated they want to do. The easiest way for them to buy shares, in bulk, at the cheapest price would be if the company issued NEW shares. My argument was thus that some major stake holders - shareholders, banks and a new mgt team have an incentive to have a RIGHTS issue or PLACING and extra money could certainly be used.

My City sources tell me that there's very little appetite for fundraisings generally, in the small caps space. Some small caps funds are facing redemptions, so the last thing they want is companies coming to them and asking for additional cash. Market conditions have completely changed. Anyway, as I explained before, it's not an issue. RBG is paying down (fairly modest) debt from its prodigious cashflows, and a fundraising is not relevant here at all.

Does anyone know the average daily net debt? Trade payables are up 3m in the last 6 months?

Again, just no relevant. This is not a financially distressed situation at all. Why are you trying to insinuate that it is?

I don't know. I know that CASH outflow in the last 12 months was at least £10m and that is a tough tanker to turn around. Extra sales are very possible with good management but naturally that comes with investment in refurbs and also marketing promotions and price cuts.

The previous cash outflow was due to a big roll-out of new sites, which cost about £1m each. That was discretionary, expansionary capex, which has now stopped. Combined with suspending the divis, the cash outflow will now turn into a cash inflow.

Thanks for your post. Truth be told, I was actually hoping you would make a comment on Jarvis Securities (LON:JIM) as I too was using your previously assumed £229m cash under management figure as part of my calculations.

You mentioned an interest rate of 1.80% for 2017. I was assuming 1.76% for 2017, so pretty close and a good starting point for my next point.

Given that:

the average Bank of England base interest rate in 2017 was 0.29% (10 months@.25% + 2 months@0.5%), and

and assuming that cash under management stayed, at the very least, constant at £229m,

then the interest revenue vs 2017 should have increased by far more than 7%.

You make an interesting point about term deposit rates though. Perhaps the company got stung by vast withdrawals in the last quarter of 2018? But that would still indicate a drastic decrease in interest income given a doubling in the average interest rate across the last 2 years.

In any case, something just doesn't seem right, and it would have been useful for management to provide a more thorough explanation on, as I see it, the lack of growth in interest income, especially if cash really has increased in 2018.

That's right. RBG venues are generally very successful late-night party venues, which do a roaring trade on Friday & Saturday nights. Every site is different. My view is that they should probably close on Mon & Tue, and trade from Weds evening onwards. There's no point in having a large bar, open all day, every day, with hardly any customers in the quiet times. It just loses money.

Years ago, I was asked to troubleshoot a central London nightclub, that was losing money, hand over fist. I (wrongly as it turned out) urged the owner to find ways of utilising this large space during the day, and Mon-Weds. He politely listened to me, and replied that I was completely wrong. He went on to close the site for most of the time, and arrange amazing party nights, with top DJs, just for about 3 nights per week. He made a fortune from it! I think RBG should probably go down the same route.

Re the specific point about Revolution Bars (LON:RBG) having two locations in the same town (often close together). This has reminded me of a discussion point from the meeting.

My own retail experience (from the 1990s, so admittedly now a bit dated) was that having multiple locations in one town was a disaster. Pilot had a tiny store in Oxford. Then our CEO opened another one, which became cost centre OX2. Then, a new shopping centre was built, and we opened OX3. All this did was cannibalise sales, and all 3 shops became loss-making. It was then a multi-year struggle to exit the stores.

The same thing happened subsequently in other towns.

Returning to Revolution Bars (LON:RBG) it does not have this problem. It has 2 successful formats, which can operate side by side. Why? Because they target different demographics. The core Revolution sites target 18-30 people, who want a banging night out, at the weekend. The secondary, Revolucion de Cuba format, is aimed at 30-45 year olds.

Management explained how the 2 formats actually work really well together, close together, in the same towns, such as Reading, Huddersfield, Southampton, and others. It doesn't cannibalise sales at all - the customers like it - youngsters in one bar, and not-quite-middle-aged in another, doing a bit of salsa, and not being bothered by the yobs.

thanks Paul for your views. I do hope that my scenario suggestion is helpful to the overall debate.
I have no position and unusually decided to contribute to the debate as I am been very tempted by the potential turnaround at Revolution Bars (LON:RBG) and thought it useful to share my doubts as to why, for me and my strategy, I've decided not to press the buy button today.

whatever happens in the future I don't see it as me being right or wrong. I see different scenarios for the future for Revolution Bars (LON:RBG) - the RIGHTS scenario is maybe only a 20% probability in my eyes but it is a scenario that I want to avoid being invested through, and if anything take advantage of if it happens by buying at that point. The cause of it might be a factor outside of mgt control. I fully appreciate that it is not the most likely scenario and re-iterate again that the reasons for it would not be negative but be because investors wanted to invest fresh funds into the potential turnaround story.
anyway it feels like repetition on my part. I've made my decision on it and will maintain on my watchlist. good luck to you and others holding.

just one specific point to reply on.....

"[sorry i don't know how to get text from a previous post in italics]
[my comment] Does anyone know the average daily net debt? Trade payables are up 3m in the last 6 months?
[your reply] Again, just no relevant. This is not a financially distressed situation at all. Why are you trying to insinuate that it is?
"

I think your analysis and contributions are amazing and invaluable to others but did feel this was a little harsh! I'd hope my lengthy posts explained my position and my views. I expressed many times that there is potential in the turnaround. I am not trying to "insinuate" anything.
I feel it is a relevant question to ask 'what is average debt?' rather than balance sheet date debt,
and it is factual that Trade Creditors are up £3m (c.15%) when trade is c.flat.
I think for a company to stop its roll out programme, and to stop paying its dividend is under some sort of financial pressure. It might very well have the potential to reverse that situation, and to reverse it quickly, and materially, but that is the future and thus an opinion about what will happen. I think it is fair to say that factually, until recently, it was over expanding and CASH negative and thus under financial pressure, and thus it is reasonable to ask questions. I have not had the benefit to meet the CEO and form an opinion based on trust in him, or visibility of broker forecasts of CASH flow, so thus I use the numbers as presented and try to see what the downsides might be.

*this debate has made me realise I should get Research Tree subscription! - thanks!

I hope the above does not seem either critical or overly sensitive - it is intended as analytical debate. We are all trying to be successful in own ways and you certainly have a fantastic track record, so whatever happens (and my 80% view is that they trade their way out of the current situation) it doesn't show anything - it is one share in a portfolio, or in my case one that I decided not for me for now.

They're quite protective of the rates they achieve. My numbers are only guesses. Eyeballing the chart in the annual report with the average annual cash balances, I suspect that the horizontal lines are at £100m, £200m and £300m. If so, that looks a bit more like the average annual balance was about £250m in 2017 and about £275m in 2018.

Either way, if deposit rates are flat, then you would expect interest income to grow at the rate of growth in cash. The 30 Jun KPI says it was 8.3%. Eyeballing the annual report chart looks like it might be 10%. I'm reasonably happy with 7%. I just don't think that movements in the base rate is a good guide as they earn vastly more than that.

One of the problems I have with Revolution Bars (LON:RBG) is that I find it hard when I look at the balance sheet to understand what gives rise to some of the numbers sufficiently to trust the figures - eg prepaid expences. I think I'd need a lot more detail to reassure me even though Grant Thornton aren't the auditors.
The Guardian piece on Patisserie Holdings (LON:CAKE) today - https://www.theguardian.com/business/2019/mar/15/patisserie-valerie-accounts-black-hole-94m-say-kpmg - naturally increases concern. Not only do we have the cash problem we knew about, but also discrepancies in asset valuation, understatement of debt and overstatement of amounts owed (I think this must include the prepayments).

Only just noticed your write up here, Paul - thank you for taking the time to meet with the CEO and to write up your views. Really appreciated and a very good additional insight into what's currently going on.

I note Superdry (LON:SDRY) is now trading at 447.8. I sold my holding a couple of weeks ago when there was disarray in the boardroom. But now that Mr Dunkerton has returned, and his opposition is (allegedly) in the process of resining, I'm wondering if the current price reflects an attractive re-entry point. The brand is still strong, the fundamentals look ok. There is no debt and it passes 10 Stockopedia screens. I'll wait a little longer until the current free fall has stopped, but I'm certainly tempted.

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I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »